How Credit Collectors Have Reinvented the Debtors' Prison

NPR just ran a story called “Unpaid Bills Land Some Debtors Behind Bars.” As they report, ”Here’s how it happens: A company will often sell off its debt to a collection agency, generally called a creditor. That creditor files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest.” Marie Diamond has more.

This is increasingly common across the country. My colleagues Matt Stoller and Bryce Covert have both written about debtors being jailed for failure to appear in court. Debtors’ prisons are illegal, and some point out that this is really jail for a summons problem, not a payment. But I haven’t had a full vision of the practice until I read this excellent working paper by Lea Shepherd of Loyola Chicago law school, “Creditors Contempt” (h/t creditslips). Beyond laying out the problems with the current system, which gives a disproportionate amount of the coercive powers of the state to creditors, this paper also has implications for another topic I’m interested in — the class bias of the submerged state.

The key here is something called in personam debt collection remedies. In an agrarian economy, it was relatively straight forward for creditors to order a sheriff to seize the property of a debtor. In rem actions, where a sheriff would go and seize property, would work just fine. But this became harder to do as time went on.

The debt collection market evolved in personam debt collection remedies. This in personam action has two goals: discovery and collection. The court orders the debtor to disclose information about his property, location of his assets, etc. to help creditors track down those assets. Then the court orders certain payments to be made, which allows for collection. This court order is enforced through the court’s authority to hold debtors in contempt, which in turn is enforced through threats of imprisonment. Depending on the jurisdiction, contempt charges can be made against either the failure to show up for the discovery process or the failure to stick to the collection ordered.

So how does this go wrong? The most obvious way is that this in personam debt collection method — which should be reserved for “extraordinary” situations — is used regularly by today’s collectors. Given that a debtor’s liberty is at stake, it seems very important that there are strict rules for this practice and that these actions are used only when appropriate. But as Shepard finds, “in personam remedies are often initiated and executed on a high-volume basis and with a striking degree of informality.”

Debtors who run into the law often don’t understand the process; since the debt has often been resold multiple times, they may not even recognize the names of the plaintiffs. It is also problematic that debtors who don’t show up for the summons are likely to be confused as to what they are being jailed for. They may think they are being jailed for nonpayment when they are actually being jailed for the failure to show up and not telling the court and creditors about their assets. It is in the interest of creditors to blur this distinction. Though debtors can often get out of jail by compliance, they may feel they need to pay off debts immediately to get out of jail instead. Debtors will be willing to make costly financial decisions, including using money that is legally protected from debt collectors, to get out of jail immediately. Indeed, many debtors are cash constrained and can’t deal with even temporary incarceration due to the costs of work and family disruptions and will be willing to do anything to get out of jail.

In many jurisdictions, bail posted to get out of being jailed for contempt of the discovery process is used to pay creditors. Besides being a great deal for creditors — as noted above, people often pay a huge economic penalty to get out of jail — it functions as a de facto debtors’ prison. As law professor Alan White described this process, “If, in effect, people are being incarcerated until they pay bail, and bail is being used to pay their debts, then they’re being incarcerated to pay their debts.” As the FTC noted, debtors being jailed for nonappearance “may be willing to pay the bail (and indirectly the judgement) using assets (such as Social Security payments) the law prohibits creditors from garnishing or otherwise obtaining to satisfy a judgement.”

Debtors can also be jailed for being in contempt of the court-ordered payment plan, an action that certainly seems like the debtor is being jailed for a failure to pay debts (see Alan White on this battle in Indiana here). This exacerbates the first problem — as Shepard notes, “It may be easier to sue a debtor than to determine if she is a viable litigation target, and even judgement-proof debtors can tap ‘last resort’ payment sources, like exempt property, loans from family and friends, and fringe credit sources like payday lenders.” This encourages creditors to go fishing for potential earnings in an area of the law that endangers the liberty and freedom of debtors.

What does this have to do with the submerged state? The government’s method of providing benefits and protections through the tax code and legal channels disproportionately helps the most well-off, if only because they pay the most in taxes. But it also helps them because they can afford the necessary lawyers and support staff to take full private advantage of these rules. Let’s look at an example Shepard provides:

Steven Lipman had fallen on hard times… Steven received a pension income of $525 per month… One creditor who obtained a judgment against Steven served him personally with notice of an in personam debt collection action…

After about a 20-minute wait, the creditor’s attorney called out Steven’s name and guided him into the hallway outside the courtroom, where five other debtors’ examinations were taking place. The creditor’s attorney asked Steven about what property he owned and the location of his bank account. Eventually, the attorney asked Steven how much money he could afford to pay each month. Steven felt flustered and wasn’t sure what to say. Feeling embarrassed about having defaulted in the first place, Steven agreed that he could pay $80 per month until the debt was paid off. Steven, unfortunately, couldn’t pay $80 per month…

[H]e hadn’t noticed that it included examples of exempt property — various assets insulated from creditors’ collection efforts. The list included pension income, Social Security payments, a certain percentage of wage payments, veterans’ benefits, unemployment compensation, workers’ compensation, alimony and child support, and some personal property. Had Steven asserted his exemptions, he would not have had to forfeit any of his money or property.

The creditor’s attorney didn’t tell him about the exemptions, and the judge never raised the issue. (Unless debtors affirmatively assert their exemption rights, judges may feel uncomfortable raising the topic. Otherwise, judges may be perceived as serving as debtors’ advocates — not as disinterested adjudicators.)

Notice that Steven is paying 15 percent of his meager income to creditors, even though if he had known about the full protections he’s entitled to under law he wouldn’t have to pay anything. Cash constrained Steven presumably couldn’t afford a lawyer — but one can imagine a richer debtor making sure each and every exemption was accounted for.

These exemptions are there for serious reasons. As Shepard notes, “Courts have articulated exemption statutes’ broad and fundamental public policy goals: 1) to provide the debtor with enough money to survive, 2) to protect the debtor’s dignity, 3) to afford a means of financial rehabilitation, 4) to protect the family unit from impoverishment, and 5) to spread the burden of a debtor’s support from society to his creditors.” With that in mind, why don’t judges take an active role in protecting exempt property?

Requirements to appear in court are being overused and abused as a way of confusing debtors and forcing a strong hand on payments. This ultimately threatens the integrity of the entire debt collection system and the crucial protection of freedom and liberty.

How Credit Collectors Have Reinvented the Debtors' Prison

NPR just ran a story called “Unpaid Bills Land Some Debtors Behind Bars.” As they report, ”Here’s how it happens: A company will often sell off its debt to a collection agency, generally called a creditor. That creditor files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest.” Marie Diamond has more.

This is increasingly common across the country. My colleagues Matt Stoller and Bryce Covert have both written about debtors being jailed for failure to appear in court. Debtors’ prisons are illegal, and some point out that this is really jail for a summons problem, not a payment. But I haven’t had a full vision of the practice until I read this excellent working paper by Lea Shepherd of Loyola Chicago law school, “Creditors Contempt” (h/t creditslips). Beyond laying out the problems with the current system, which gives a disproportionate amount of the coercive powers of the state to creditors, this paper also has implications for another topic I’m interested in — the class bias of the submerged state.

The key here is something called in personam debt collection remedies. In an agrarian economy, it was relatively straight forward for creditors to order a sheriff to seize the property of a debtor. In rem actions, where a sheriff would go and seize property, would work just fine. But this became harder to do as time went on.

The debt collection market evolved in personam debt collection remedies. This in personam action has two goals: discovery and collection. The court orders the debtor to disclose information about his property, location of his assets, etc. to help creditors track down those assets. Then the court orders certain payments to be made, which allows for collection. This court order is enforced through the court’s authority to hold debtors in contempt, which in turn is enforced through threats of imprisonment. Depending on the jurisdiction, contempt charges can be made against either the failure to show up for the discovery process or the failure to stick to the collection ordered.

So how does this go wrong? The most obvious way is that this in personam debt collection method — which should be reserved for “extraordinary” situations — is used regularly by today’s collectors. Given that a debtor’s liberty is at stake, it seems very important that there are strict rules for this practice and that these actions are used only when appropriate. But as Shepard finds, “in personam remedies are often initiated and executed on a high-volume basis and with a striking degree of informality.”

Debtors who run into the law often don’t understand the process; since the debt has often been resold multiple times, they may not even recognize the names of the plaintiffs. It is also problematic that debtors who don’t show up for the summons are likely to be confused as to what they are being jailed for. They may think they are being jailed for nonpayment when they are actually being jailed for the failure to show up and not telling the court and creditors about their assets. It is in the interest of creditors to blur this distinction. Though debtors can often get out of jail by compliance, they may feel they need to pay off debts immediately to get out of jail instead. Debtors will be willing to make costly financial decisions, including using money that is legally protected from debt collectors, to get out of jail immediately. Indeed, many debtors are cash constrained and can’t deal with even temporary incarceration due to the costs of work and family disruptions and will be willing to do anything to get out of jail.

In many jurisdictions, bail posted to get out of being jailed for contempt of the discovery process is used to pay creditors. Besides being a great deal for creditors — as noted above, people often pay a huge economic penalty to get out of jail — it functions as a de facto debtors’ prison. As law professor Alan White described this process, “If, in effect, people are being incarcerated until they pay bail, and bail is being used to pay their debts, then they’re being incarcerated to pay their debts.” As the FTC noted, debtors being jailed for nonappearance “may be willing to pay the bail (and indirectly the judgement) using assets (such as Social Security payments) the law prohibits creditors from garnishing or otherwise obtaining to satisfy a judgement.”

Debtors can also be jailed for being in contempt of the court-ordered payment plan, an action that certainly seems like the debtor is being jailed for a failure to pay debts (see Alan White on this battle in Indiana here). This exacerbates the first problem — as Shepard notes, “It may be easier to sue a debtor than to determine if she is a viable litigation target, and even judgement-proof debtors can tap ‘last resort’ payment sources, like exempt property, loans from family and friends, and fringe credit sources like payday lenders.” This encourages creditors to go fishing for potential earnings in an area of the law that endangers the liberty and freedom of debtors.

What does this have to do with the submerged state? The government’s method of providing benefits and protections through the tax code and legal channels disproportionately helps the most well-off, if only because they pay the most in taxes. But it also helps them because they can afford the necessary lawyers and support staff to take full private advantage of these rules. Let’s look at an example Shepard provides:

Steven Lipman had fallen on hard times… Steven received a pension income of $525 per month… One creditor who obtained a judgment against Steven served him personally with notice of an in personam debt collection action…

After about a 20-minute wait, the creditor’s attorney called out Steven’s name and guided him into the hallway outside the courtroom, where five other debtors’ examinations were taking place. The creditor’s attorney asked Steven about what property he owned and the location of his bank account. Eventually, the attorney asked Steven how much money he could afford to pay each month. Steven felt flustered and wasn’t sure what to say. Feeling embarrassed about having defaulted in the first place, Steven agreed that he could pay $80 per month until the debt was paid off. Steven, unfortunately, couldn’t pay $80 per month…

[H]e hadn’t noticed that it included examples of exempt property — various assets insulated from creditors’ collection efforts. The list included pension income, Social Security payments, a certain percentage of wage payments, veterans’ benefits, unemployment compensation, workers’ compensation, alimony and child support, and some personal property. Had Steven asserted his exemptions, he would not have had to forfeit any of his money or property.

The creditor’s attorney didn’t tell him about the exemptions, and the judge never raised the issue. (Unless debtors affirmatively assert their exemption rights, judges may feel uncomfortable raising the topic. Otherwise, judges may be perceived as serving as debtors’ advocates — not as disinterested adjudicators.)

Notice that Steven is paying 15 percent of his meager income to creditors, even though if he had known about the full protections he’s entitled to under law he wouldn’t have to pay anything. Cash constrained Steven presumably couldn’t afford a lawyer — but one can imagine a richer debtor making sure each and every exemption was accounted for.

These exemptions are there for serious reasons. As Shepard notes, “Courts have articulated exemption statutes’ broad and fundamental public policy goals: 1) to provide the debtor with enough money to survive, 2) to protect the debtor’s dignity, 3) to afford a means of financial rehabilitation, 4) to protect the family unit from impoverishment, and 5) to spread the burden of a debtor’s support from society to his creditors.” With that in mind, why don’t judges take an active role in protecting exempt property?

Requirements to appear in court are being overused and abused as a way of confusing debtors and forcing a strong hand on payments. This ultimately threatens the integrity of the entire debt collection system and the crucial protection of freedom and liberty.